San Francisco-based mobile gaming startup Funzio had just come off making more than $5 million in sales per month when it sold to Japan’s GREE for $210 million last week. Profits may be another story, and there’s less visibility into that. But Funzio had to decide between raising additional funding or selling at the time the deal happened.
The numbers were revealed in GREE’s earnings statement today. Funzio’s acquisition comes at a very fascinating time for GREE, a $4.8 billion mobile gaming company from Japan. Like Zynga in the U.S., GREE and its archrival DeNA are part of a younger vanguard of freemium gaming companies that have found success in their home market of Japan. The company made $168.5 million (13.4 billion yen) in net income on $578.9 million in revenue (46.2 billion yen) in the quarter ending in March. Just for comparison, that’s about 80 percent more revenue than Zynga in the same time period.
But there are threats on the horizon. GREE’s shares were absolutely slaughtered on the Tokyo Stock Exchange on Monday. The company’s shares fell a record 23 percent after the Japanese government said it was investigating the legality of various game mechanics in the social gaming industry. Many Japanese games have a slot machine-like mechanic called “Gacha,” where players will randomly win different special items. If they win all the items, they might get a grand prize. The National Consumer Affairs Agency said it’s now looking at regulating this tactic, which could seriously crimp revenues for GREE.
If anything, this underscores the urgency there is in expanding the company abroad. With the Japanese market becoming saturated, GREE is looking to the West and it’s done two major acquisitions to break into the U.S. with the $104 million deal to OpenFeint and last week’s $210 million deal to buy Funzio. The plan is to be a dual games platform and developer, just like the company is in Japan. They’ll make their own in-house games, but they’ll also distribute, publish and promote games from other developers.
San Francisco’s Funzio fits into the first-party game development side. The company, which was started by experienced game developers who had spent time at Zynga, Storm8 and hi5, had three mobile gaming titles to its name. They were behind graphical role-playing games like the mafia-themed Crime City, the military-themed Modern War and the fantasy-themed Kingdom Age.
They only arrived on mobile platforms last August with the debut of Crime City, a brand that the company had already put on the Facebook platform. That set them up to have a $2 million quarter between July and September of last year. Then they launched Modern War in November and the two titles got them to a $6 million quarter during Christmas. Finally, Kingdom Age, launched last month, got them to a $12 million quarter.
Just after Kingdom Age launched, I spoke with Funzio’s vice president of business development Jamil Moledina. Even though the game was downloaded at roughly the same pace that the company’s earlier games were, engagement was up. Both Modern War and Kingdom Age got to 1 million downloads in about the same time. But Kingdom Age saw the equivalent of 93 years of gameplay, while Modern War saw about 50 years of gameplay in its first five days.
Again, I don’t really have visibility into profits. But it wouldn’t be surprising if margins were tight as the cost of marketing apps and acquiring users has gone up dramatically over the past year. Glu Mobile, another San Francisco-based mobile game developer that’s publicly traded, posted very strong quarterly growth with $17 million in smartphone revenues for the first quarter. But it still reported a net loss of $6.8 million, which was probably partially fueled by its lingering featurephone gaming business.
See the original post: Funzio Was Making $5M In Sales Per Month When It Sold To GREE For $210M
In what will be a bellwether for the mobile gaming industry after Zynga’s deal to buy OMGPOP, Funzio is looking to raise $50 million at a $350 million pre-money valuation, according to sources familiar with the talks. The company declined to comment.
Funzio is the maker of Crime City and Modern War, both graphical RPGs that have held top ranks on the grossing charts on iOS. Their vision is to offer true cross-platform games that work across the web and mobile devices.
So here are pluses: Funzio has a hungry and experienced team. The company’s chief executive Ken Chiu previously sold a startup to Zynga and served as a general manager for a little under a year there. Both he and Anil Dharni were behind Storm8, another mobile gaming company with several top-grossing Android games under its belt, before they split with the other co-founders and started Funzio. The company’s roadmap and traction were compelling enough that they were able to poach Jamil Moledina, an executive who spearheaded third-party publishing efforts for Electronic Arts.
Funzio has a proven ability to launch games on Facebook and mobile platforms. At its peak, Crime City has 7.3 million monthly active users on Facebook, according to AppData. (It now has 1.6 million monthly active users.) The company’s two iOS games have managed to keep grossing rankings in the Top 50 in the U.S. since the beginning of the year. (See the charts below from rankings tracker App Annie.)
A $400 million post-money valuation is not unreasonable when benchmarked against publicly-traded mobile gaming companies. This isn’t a perfect comparison since every gaming company has a slightly different model and target market, but Glu Mobile, a publicly-traded company that has some decently ranked titles but is also saddled with a declining featurephone business, has a market capitalization of $281.8 million. Gameloft, a French mobile gaming company that as a similar target demographic as Funzio, has a market capitalization of 365.5 million euros ($477.6 million).
However, there are also broader industry dynamics that are working against Funzio: User acquisition costs have risen dramatically over the past year. Apple has cracked down on cheaper and arguably more unscrupulous forms of user acquisition like download bots, which has forced marketing costs higher across the board for every game developer.
Why does this matter? Well, roughly speaking: freemium gaming companies earn the spread or difference between their lifetime earnings per user and the cost to acquire a new user. When marketing costs go up, that profit margin narrows. While both iOS and Android have larger reach than they did a year ago, the profit per user is likely lower because of increased user acquisition costs.
It’s also hard to see the iOS or Android platforms lending themselves to a single dominant gaming company in the way that Facebook gave rise to Zynga. Mobile gaming has been far more heterogeneous than Facebook has been. There is more diversity in gameplay. On the iPhone, you can see everything from immersive, console-quality titles like Infinity Blade to platformers like Temple Run to casual, freemium titles like Dragonvale.
Distribution is also fundamentally different. Because users discover games through their friends on Facebook instead of on a top downloaded list, the network effects are far more powerful and lend themselves to more of a winner-take-all effect on Facebook. This hasn’t been the case so far on Android or iOS.
Lastly, while I said earlier that $400 million post-money isn’t crazy compared to publicly-traded companies, investors are obviously going to want a return. So investing at that valuation is essentially a bet that Funzio can either go public or be bought by an existing gaming company at a decent multiple. EA already fired many of its bullets with last year’s deal to buy PopCap Games for up to $1.3 billion. Zynga is open to a deal in the $1 billion range. But you’d really have to have the momentum (or something special in terms of execution) to force their hand in the way that the rapid rise of OMGPOP’s Draw Something cannibalized the player base of Zynga’s hit Words With Friends.
If Funzio does go out at a $350 million pre-money valuation, it’s worth comparing that against valuations in the mobile gaming space from 6 months and a year ago. Around the same time last year, Rovio closed a $42 million round of funding that gave it a post-money valuation of around $200 million. That’s when iOS gaming was more profitable per user because Apple still allowed incentivized downloads and offer walls.
So it looks like valuations may have corrected a bit since late last year. Other smaller deals have gone though though. Another mobile gaming company, Addmired, recently renamed itself Machine Zone and picked up $8 million in a round led by Menlo Ventures.
Read the rest here: Mobile Gaming Startup Funzio Is Raising $50M At A $350M Valuation